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The company has been plagued with multiple senior management changes and initiatives that have greatly misaligned its strategic decisions with its traditional competitive advantages. Following a brief company history and analysis of the current retail industry’, an exploration of J. C. Penne’s recent failings is conducted. Finally, recommendations are offered to assist the company in a major turnaround. History, Business Model, and Profitability James Cash Penny, at the age of 26, opened his first retail store, under the name ‘The Golden Rule”, in 1902 in Icemaker, Wyoming.

After initial success, the company experienced significant growth and expanded rapidly over the years and survived the Great Depression. Today, there are approximately 1 1 00 J. C. Penny stores throughout the United States as well as in Puerco Rice, Mexico, and Chile. J. C. Penny’s business model was to offer high-quality, low-cost products to customers for their everyday needs. It provided sales discounts and was very good at adapting to changing customer habits as the years progressed. The company experienced a rapid growth and expansion from the sass’s to sass’s.

The revenues continued to row even during the depression years and right before its 50th anniversary, the sales were at SSL billion. During the next two decades, the company continued to grow as it entered the mail-order and discount business operations with the acquisition of General Merchandise Company. While the company was riding high on these achievements, the recession that began in 1974 took its toll. J. C. Penny’s stock plunged from a high of $51 a share to $1 7 and earnings dropped from $185. 8 million to $125. 1 million.

As the company expanded over the years, it faced tough competition from other mass marketers as well as specialist apparel stores. The company has restructured a couple of times to reposition itself and return back to the profitability level it experienced in it’s early years. The sales continued to grow as other initiatives such as women’s, men’s and kids’ fashion programs and home furnishing lines in new markets were added. However the income and per share earnings decreased significantly from $577 million to $80 million due to a shaky economy and tough competition.

The company rebounded in the mid sass’s due to strong catalog sales and record performance from it’s Insurance and National Bank businesses rather than it’s core retail business. However, this success did not last long into the new millennium and growth slowed as J. C. Penny began to see competitors eat into its market share. “The company had become bracketed by department stores such as Macy’s from above, while discount stores such as Target encroached from below. J. C. Penny’s market position became much more focused upon continuous sales and price competition rather than quality and value. Exhibit 4 shows how fast the company’s performance declined between 2009 and 2014 driven primarily by reorganization put into place by management in 201 1 to address the competitive landscape. This was the sharpest drop in net revenues the company experienced in it’s history ; net revenues decreased by $6. 6 billion while net margin decreased by 14. 8%. This level of profitability is not feasible for the company’s survival as it seeks to find its’ place in the market and remain competitive. The Industry and Environment Within the bigger retail industry, J. C.

Penny belongs to the department store niche, which consists Of retail establishments offering a wide range Of consumer goods in different product categories known as “departments”. Department stores usually sell such items as clothing, furniture, home appliances, toys, cosmetics, toiletries, and sporting goods. In the U. S. , the department store category can be broken down into different socio-economic segments: Upscale: Barneys New York, Beresford Goodman, Lord & Taylor, Bloodiness’s, Dullard’s, Asks Fifth Avenue, Anemia Marcus. Nordstrom Middle-market: Macy’s, Carson Peppier Scott Down-market/Suburban: J.

C. Penny, Kohl’s, Sears Discount department stores: Target, Smart, Wall-Mart, Meijer The retail industry’ overall has been getting more competitive and department stores are experiencing greater pressure from Changing nag consumer tastes. New retail formats are emerging, such as big box retailers that are free- standing superstructures, and small specialty stores that take up space in shopping malls. Additionally, several large international clothing retailers are entering the U. S. Market and are directly challenging the traditional U. S. Department stores.

Retailers have started focusing on the “Omni-channel” consumer, defined as those consumers who use the retailer through the internet, on mobile devices, and/or in the brick and mortar stores. These retailers have largely incorporated e-commerce into their practices and invested heavily in their online operations. They are utilizing their physical presence to supplement their online business by having customers pick up products in-store that they bought online. To increase sales, retailers are investing in personalized marketing to reach these consumers over the phone and web.

But because Of the generational shift to online and mobile shopping and the volume of information available at the point of sale, customer loyalty in the retail industry is reducing. Retailers’ customer retention cost is increasing, but this presents a huge value for organizations that can determine how to make their existing customers return more often. A long- term transition affecting the industry is that the younger generation is moving to cities and choosing to drive less. This is causing the retail industry to focus more on an urban rather than suburban population.

The changing demographic will force retailers to have smaller stores within urban cities that are accessible via either public transportation or walking. Moreover, consumers want an environment that is easy to navigate, convenient, and fun. Retailers that strike the right balance in their stores will benefit the most. Lastly, the retail industry as a whole is achieving backbend efficiency through SE of technology. Most retailers have invested in data analysis tools to identify poorly performing stores and are either fixing problems or closing stores earlier than they used to.

On the supply side, retailers are using technologies like Radio Frequency Identification Devices (RIFF) to track shipments and inventory in stores so there is less leakage and supplies can be automatically re-ordered. This has allowed retailers to reduce the number Of personnel needed to manage their supply chain and operations, resulting in improved operating margins especially for some retailers like Macy’s and Kohl’s. Strategy Analysis Since J. C. Penny’s humble beginnings in Wyoming over one hundred years ago, the company has established a long-running legacy.

Over time, this legacy has become one of the company’s sustained competitive advantages and has helped its survival during some tumultuous decades. This reputation developed from its main competitive advantages stem from its core competencies: a wide array of product offerings that allow a middle- aged mother to provide for her whole family, private and exclusive relationships with manufacturers, and an emphasis on stellar customer arrive. The company’s founder, James Cash Penny, even declared customer service as a Core Value: “The public is not greatly interested in saving a little money on a purchase at the expense of service. In the past J. C. Penny has focused on customer service as an important core competency. While these sustained competitive advantages have served the company well in the past, the company has struggled more than ever in recent decades. J. C. Penny has tried turning these strategic resources into core competencies, but time has proven that these competencies have not remained sustainable according to the four guidelines outlined by Jay Barney. While the resources are still deemed valuable, they are not rare, as seen by the many other competitors in the retail industry and as outlined above.

There are many competitors selling merchandise that are arguably close or perfect substitutes to J. C. Penny’s wares. Most importantly, J. C. Penny fails to have an advantage that is inimitable; outsiders from the company can easily understand the company’s strategies and replicate them. These competitive advantages are no longer sustainable since they do not pass the test of these our tenets and the company has failed in two other main areas: J. C. Penny has exhibited a lack of strategic positioning, and they disregarded the target market by implementing a failure of a new pricing strategy.

Penne’s lack of strategic positioning became glaringly apparent when the economic recession hit in 2008. Competitors such as Target and Walter, the mass merchandise retailers who focus on a general strategy of cost leadership as a competitive advantage, and retailers such as Macy’s and Nordstrom, who rely on differentiation as a competitive advantage to reach n increasingly middle and upper class clientele, were able to survive better during these times with the help of their respective distinct strategies. J. C. Penny saw its profits dip far more because of its ineffectual position between these two generic strategies.

Michael E. Porter’s paper argued that companies must choose one of two generic strategies (if not a more focused strategy): a differentiation strategy or cost leadership strategy. Some of the reasons that this framework was no longer sustainable were due to primarily two large impacts to the firm’s value chain. The firm value chain consists of Inbound Logistics, Operations/Production, Marketing/Sales and Service. Operations/Production and Marketing/Sales had the largest impact on the sustainability of the firm. Operations/Productions The previous strategy J. C.

Penny used to distribute coupons was by mailing discount coupons to customers, and then have the customers come into the store to redeem them. The deal was completely dependent on the effort that the customer put into that item. In 2012, the new CEO, Ron Johnson, changed the mechanism for how discounts were distributed. Instead of using coupons, he implemented a “Fair and Square?’ pricing strategy. This gave everyone in the store the same deal, whereby goods would not go ‘on sale’ because they would now always be set at the best possible prices. Intuitively. T seems as though this would have been better for the J. C. Penny customers, but the issue was that management never looked at J. C. Penne’s target customer segment. The customers that were most loyal to J. C. Penny found great enjoyment in “earning” a better deal than their friends and family. When this friendly competition suddenly changed, where everyone was entitled to the same deal, many customers left because they no longer believed Spinney eave them the best deals. They could no longer “brag” to friends and family about the deals, and the new sales model was confusing.

Marketing/Sales This is J. C. Penny’s key differentiator for determining its economic logic. The low cost strategy worked for years when information was uneven between customers and J. C. Penny. This allowed J. C. Penny to give discounts on items which were not always necessarily the lowest prices. Now that people have the ability to check competitors’ prices by looking at their phones, the playing field is even. People can price check any item at any time with ease, while J. C. Penny’s previous coupon distribution had customers coming to the store often and assume they were getting the best deal.

Along with buying that discounted item, people would often buy other items they needed while at J. C. Penne’s and the discounted item was a loss leader for the other items that were purchased. As per Humpback and Friskiness’s Strategy Diamond, a well-functioning strategy will demonstrate congruence and fit amongst its moving parts – the arenas it competes in, the vehicles it uses, the differentiators it has, how it stages its products/services and how it all contributes to the economic logic.

Applying this framework to J. C. Penny reveals how incoherent these elements are, thus explaining why it has not kept up with its competition. Arenas J. C. Penne’s product lines include: clothing, cosmetics, footwear, jewelry, furniture, housewives and electronics. Having numerous product lines is not an issue per SE. Competitors like Macy’s have similar offerings. But what should a shopper go to J. C. Penny for – does it have a wide selection within each product line, great customer service or the designer brands?

Who is their target market – moms with young school-age children, or middle-aged people and “empty nesters” who need comfortable, convenient shopping? The company offers expensive products within its housewives department showcased along with discounted clothing apparel, which is confusing and inconsistent to a shopper’s experience. Vehicles In 2011, J. C. Penny announced that it created a Growth Brands Division, which will pursue high potential opportunities in the retail sector. These initiatives were to be separate from the firm’s core J. C.

Penny brand and will leverage its exceptional merchandising, marketing, product development, sourcing, IT, planning and allocation, and consumer research capabilities to rate new retail businesses and drive sales growth. The first two were supposed to be online-only businesses: Clad, to sell designer apparel to males, 25 to 54; and Gifting Grace, focusing on women, 30 to 54. The third, The Foundry Big & Tall Supply co. , was to sell big and tall clothing for men online and via the stores. Both online businesses were shut down in early 201 2 as part of the restructuring by Ron Johnson.

Last month, J. C. Penny announced that it is shutting its ten Foundry Big & Tall Supply Co. Outlets, as well as its e-commerce platform, in its aggressive attempts to curtail costs and enhance profitability. The brand will continue to be marketed and sold at J. C. Penne’s outlets in the men’s apparel section “Big and Tall”. This effort is in line with its current commitment to cut down costs while expanding its current merchandise for men in the convenience of its existing stores across the country. After Ron Johnny’s exit, J. C.

Penny had to re-merchandise to replace unpopular products launched during that period. And that process tanked the company’s inventory turnover. An consistent and stabilized inventory turnaround is possible but only if the other elements of this framework take better shape. Differentiation As mentioned before, the firm has not been able to define its core competency. Ex-CEO Ron Johnny’s pricing overhaul did not work out and it indicated that if J. C. Penny is trying to keep customers in the store only by slashing prices, they’ve already lost.

Even a massive, high-volume retailer like Wall-Mart does not compete solely on price. It differentiates its service by being convenient – open 24 hours, offering food, dry goods and services all in one location. Both low cost and convenience are attractive features to millions of its customers. J. C. Penny has not clearly outlined any other fragmentation factors. Staging Ex-CEO Ron Johnson had planned to carve each of its stores into about 100 sleek, neat sections featuring specific brands or product categories. The idea was to have a store-within-a-store like its competitors.

Execution of these grandiose plans was not consistent and moved extremely slowly. This caused inefficiencies at the store that diminished all the promotional and marketing initiatives undertaken by management. The pictures in Exhibit 1 show how modern furniture intended for store beautification and customer convenience remained encased in plastic. Economic Logic In fiscal 2014, the gross margin fell below 30%, about ten percentage points below its 201 1 peak. Macy’s had surpassed 40% in each Of the past five years, and the more discount-orientated Kohl’s had stayed above 35%.

As J. C. Penny’s revenue has collapsed, the company has attempted to slash operating costs in order to compensate. But without significant store closings, there is a limit to how low costs can go before the customer experience begins to suffer. During the past two years, J. C. Penny’s operating expenses have gone beyond 40% while its competition has managed to maintain theirs round 35% or less. Exhibit 2 shows a historical comparison of its expenses with its competitors indicating how it is getting out of hand.

Days inventory outstanding, or DID, is a handy metric that shows how quickly a store can move inventory off of its shelves. Generally, the competitor with the lowest DID has the advantage. Higher DID numbers mean that the company is not moving products efficiently, so it might resort to margin-choking promotional offers to simply get rid of overstock. J. C. Penny had some serious inventory turnover issues last year as returned CEO Myron “Mike” Oilman worked to nod the changes made during Ron Johnny’s brief time at the reins.

Those inventory issues have now begun to stabilize, but fixing them required some steep price slashing for a few quarters (Refer to Exhibit 3). This proves that J. C. Penny doesn’t have an economic logic rooted in its fundamental and relatively enduring capabilities. Recommendations The J. C. Penny story is yet another example of how brick and mortar retailers need to reassess why people should still drive to the mall, spend an hour in the store, and wait in line to buy clothes when they could shop online instead. Instead of just lowering prices and hoping to hang on to fickle, price-sensitive customers, J.

C. Penny should focus on a differentiation strategy rather than a low-cost strategy by instituting the following: Reduce the number of brands it sells and focus on more unique, trendy clothing. Focusing on their most profitable categories would allow them to get rid of any additional logistical costs and hassle they currently deal with for those unprofitable categories. Becoming niche in a few categories would allow them to be more successful than average in multiple categories. If J. C. Penny does want to get into the remit market, then it should look at opening an entirely different brand separated from J.

C. Penny. This new brand could allow them to test the market and determine if they want to change their business model or strategy. Invest in its online operations: J. C. Penny needs to focus on creating a visual experience online for consumers by showcasing its unique clothing. Moreover, it needs to utilize its physical presence to entice customers to pick up their purchases the same day. The marriage of online and offline will allow J. C. Penny to differentiate itself from other online competitors. Increase customer retention: J. C.

Penny needs to create an attractive customer loyalty program that rewards customers for their loyalty. For example, it could have member only shopping hours where the season’s new clothing could only be bought by members who achieve a certain status. It should focus On creating an avid community around its brand by invigorating its customers to invest in the brand. Re-energize its in-store experience by focusing on the environment and customer service. J. C. Penny needs to put more staff on duty to assist customers with their shopping needs and provide a more personalized experience.

Moreover, it needs to invest in employee training and retention so customers can interact with happier, better-informed customer service staff. Over time Penny has become uncertain and unclear about its strategic positioning in the retail industry, Its core competencies, and its plan to retain its customer base amid a changing technological landscape. For a full turnaround, the firm should first adopt a differentiation approach and whittle down its product offerings to its most successful lines, invest heavily in its e- commerce operations, adjust its loyalty program to increase customer attention, and improve the customer service experience.

By implementing these initial changes, the company can focus on its customers’ needs and remain a true challenger in the retail industry. Exhibits 1 through 4 Exhibit 1: These pictures indicate that the execution of the makeover was staggered and inefficient thereby rendering the marketing efforts ineffective. Exhibit 2: Expenses expenses compared to its competitors Data from Mornings for 2010-2013, and earnings reports for 2014 Exhibit 3: The following chart compares the DID metric between Macy’s, Nordstrom, and Spinney.

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